8/4/2019 A Word of Caution for the Retail Investor
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Assumption: There exists a disconnect between the markets and
reality with regard to valuation andmethods to determine the same.
Also assume that we are all rational investors.
The simplest maxim for a retail individual is buy low, sell
high. Investment theory, macro-microeconomic policy everything else
is just so much noise. Now reflect how many times you
actuallyfollowed this maxim. As with everything else in life,
practical application is the greatest challenge. It isvery
difficult to follow the maxim when the neighbours are all either
panicking or in euphoria. Goingwith the herd is as strong an
instinct as life-preservation, but a great deal more subtle.
Look at the present situation, the domestic market we see today
is on the last legs of the mispricingof risk phenomena, that has
been the life of the party for more than a decade. Institutions
mispricedthe risk of perverse incentives, macro-economic policy
wonks mispriced the importance of achieving astable inflation rate,
loan officers mispriced the cost of giving loans to high credit
risk clients,bankers mispriced the cost of packaging and leveraging
risky products and rating agenciesmispriced the cost of closing
their eyes to everything.
Now lets agree that we all got sucked in by the aggressive
expansion of the last decade. Truth be toldwe are still reluctant
to give up this story. The present situation is pretty muddled and
for a retailindividual extremely confusing. Especially so as the
present market rally has come on the heels of asobering shock. Look
around, the BSE and NSE are hovering within sniffing distance of
their pre-2008highs along with high growth for gold, silver, oil.
Throw in a few scares like the rare earth shortage,fear of
sovereign default contagion spreading through EU, political
instability throughout the middle-east, food price inflationary
shocks, natural disasters and we have got the recipe for the
perfect storm.The market is currently living out its half-life
moment.
The prime market of the world, United State of America is
presently involved in papering over its shotup economic engine by
monetising its GDP. The ill-effects have been out-sourced to the
world, such isthe price we pay for the reserve currency. Credit
expansion with low policy rates and sustained highliquidity has
been the default policy and the same is being rolled out on a world
wide scale in anattempt to ride out this storm. For the politicians
and policy makers such short term strategies makesense especially
in a democratic set-up where the costs will be borne by the next
government.
The present uncertainty is not just a regular event but a
limitation of the model. It is imperative that
the economic model of sustained high growth, low interest rates,
high and continuous liquidity withlarge resource utilisation be
discarded. In the meanwhile, the retail investor will continue to
be takenfor a ride on the wildest roller coaster in the world.
